Corzine Defense to Misuse of Customer Cash Is Off Point

By Matthew Leising and Tiffany Kary -
Jun 29, 2013

Jon Corzine, former chief executive of bankrupt futures brokerage MF Global Holdings Ltd., has said he never ordered any misuse of customer funds to help his firm stay afloat as it dealt with margin calls on bad bets.

For the Commodity Futures Trading Commission, which said yesterday that Corzine “bears responsibility for MF Global’s unlawful acts,” that defense is irrelevant.

The CFTC sued Corzine, 66, yesterday for failing to oversee the company properly while it spiraled toward failure in 2011 as $1.6 billion in customer funds went missing. The CFTC alleged he did nothing about inadequate controls over misuse of customer funds, that he was aware of the firm’s extreme shortage of cash and that he didn’t ask any questions about where the money was coming from to make transfers he ordered.

“That’s what all of this is about,” said Gary DeWaal, who served as general counsel for Newedge Group SA, one of the largest futures brokerages, for 17 years before starting his own consulting firm. “There was a gas smell at MF Global, and no one checked the stove.”

In effect, the CFTC claims in its complaint that the one who truly knew what the gas smell was about was Edith O’Brien, MF Global’s former assistant treasurer. Her job was to move client assets between the firm’s accounts as needed.

Under Oath

Corzine testified to Congress under subpoena and under oath that he asked for overdrafts with JPMorgan to be corrected, and that he never gave any instruction to misuse customer funds. He also said he didn’t believe anything he said could reasonably have been interpreted as an instruction to misuse customer funds.

“I certainly would never intend to direct or have segregated funds moved” Corzine, a former Democratic senator and New Jersey governor, said Dec. 8 before the House Agricultural Committee.

“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine said. He also said he was “stunned” when he learned that the company couldn’t account for hundreds of millions of dollars.

The agency doesn’t claim O’Brien told Corzine directly that she used customer money for the brokerage’s business needs, a violation of the Commodity Exchange Act. Instead, it repeatedly says Corzine never asked any questions about how she was doing what he ordered her to do.

JPMorgan Overdraft

Take the episode of the JPMorgan overdraft. JPMorgan, one of MF Global’s clearing banks, notified the futures brokerage on Oct. 28, three days before its bankruptcy filing, of an overdraft in its accounts, the complaint alleges. Before JPMorgan would help MF Global sell assets to raise cash, it required the firm to erase the overdraft, the complaint said.

Corzine told O’Brien to transfer a needed $175 million payment, saying “it was ‘the most important thing she can get done that day,” according to the complaint. “Corzine asked no questions to ascertain how O’Brien would find funds to pay for the overdrafts, notwithstanding his knowledge of the firm’s extremely limited sources of cash,” the complaint states.

Customer Funds

O’Brien used customer funds to make the payment, according to the complaint. A recorded telephone conversation captured O’Brien telling a colleague, “the only place I had the 175 million, ok, was in seg,” the complaint said, referring to segregated customer accounts.

Futures brokerages are never allowed to use customer funds for the brokerage’s own needs, said DeWaal, founder of Gary DeWaal & Associates LLC.

In another instance cited in the complaint, Corzine spoke on a recorded phone line to an unidentified employee about how “to strategize how they could use customer segregated funds” to induce JPMorgan to clear MF Global’s trades more quickly.

“Corzine: We have a money management account at Chase, if my memory serves me,” the complaint said. “Employee #1: Yeah, it’s the JPMorgan Trust account, but that’s cash seg for clients ~- it has nothing to do with greasing our wheels for Chase to move.

“Corzine: I understand but you put it in a tri-party, and then once the securities have started moving, then you move it back to the, um -- this is the same thing we did last night, they left it in the tri-party, the seg money.”

Knowledge of Rule

That conversation shows Corzine had knowledge of the customer-funds rule and whether that money should be used, said Michael Weinstein, a former trial attorney with the Department of Justice and chairman of Cole Schotz’s white-collar practice in Hackensack, New Jersey.

“That is a problem for him,” Weinstein said. “He can’t play deaf and dumb and blind.”

Congressman Michael Grimm, a Republican representing Staten Island and Brooklyn in New York, said today in a statement that Attorney General Eric Holder should file criminal charges against Corzine “for the collapse of MF Global and the theft of $1.6 billion in customer funds.” The politician also cited “evidence of perjury” committed by Corzine related to Congressional testimony.

Senate Testimony

On December 13, 2011, Corzine told the Senate Committee on Agriculture, Nutrition and Forestry under oath, “I never directed anyone at MF Global to misuse customer funds. I never intended to and as far as I’m concerned I never gave instructions that anybody could misconstrue.”

As to whether that justifies perjury charges will depend on how aggressive prosecutors are, Weinstein said. Even if they can’t catch him in an outright lie, evidence could show that he knowingly misled Congress.

“This is an unprecedented lawsuit based on meritless allegations that Mr. Corzine failed to supervise an experienced back-office professional who was located in a different city and who did not report to Mr. Corzine or even to anyone who reported to Mr. Corzine,” his lawyer, Andrew Levander, said in a statement, referring to O’Brien, who was based in Chicago. “No evidence has been found that contradicts Mr. Corzine’s sworn testimony before Congress.”

Evan T. Barr, a lawyer for O’Brien, wasn’t immediately available for comment.

The case is U.S. Commodity Futures Trading Commission v MF Global Inc. et al 13-cv-04463; U.S. District Court, Southern District of New York (Manhattan.)